The House of Rothschild (79 page)

It was also nonsense to suggest (as Revelstoke’s brother Colonel Robert Baring did) that the Rothschilds were in any way responsible for the Russian government’s massive cash withdrawals from Barings which brought the crisis to a head. There is no question—as the letters from Paris to New Court show—that the Rothschilds intended to make “the greatest efforts to forestall a catastrophe,” provided these did not jeopardise the position of any other bank. As this suggests, Natty was unwilling to make any commitments until he was sure that not only the Bank of England but also the Treasury were willing to give their support to a rescue operation. The fact was, as Natty explained to Reginald Brett on November 29, that some of the Russian deposits withdrawn from Barings had ended up at New Court. “They now have a large sum belonging to the Russian Government,” Brett reported:

There was thus an element of self-interest in Natty’s calculations.

Credit is usually given to the “the Sinbad of Threadneedle Street”—as Goschen’s successor Harcourt called the Governor of the Bank—for saving Barings from oblivion and the City from “a panic of unparalleled dimensions.” This, as Lidderdale himself acknowledged, is to understate Natty’s role in persuading the government to act. Goschen’s initial reaction—seconded by the First Lord of Treasury, W. H. Smith—was to refuse Lidderdale’s request for £1 million, arguing that “la haute finance” would have “to find its own solution.” The most he was prepared to offer, he told Lidderdale on November 11, was authorisation to suspend the Bank Act if the drain on the Bank’s reserve grew too great (an offer which was refused). But, as Goschen warned Salisbury, “the Rothschilds [were] sure to put the screws on”; and when the Prime Minister sent for Natty on November 12 they were put on with a vengeance. The Barings, Natty told Salisbury contemptuously, were finished; at most the partners would be left with £10,000 a year apiece and might “prefer to cut up their remaining capital and retire into the country on 4 per cent a year ... each.” The danger was that their losses were so great as to threaten “a catastrophe [which] would put an end to the commercial habit of transacting all business of the world by bills on London.” Natty subsequently made a similar point to Brett: if Barings had “been allowed to collapse, most of the great London houses would have fallen with them.” His conclusion was that nothing but government intervention could avert a crisis greater even than that of 1866. As would happen again in 1914, a crisis on the London acceptance market was presented as a crisis for the City as a whole, and hence for the country.

The most Natty was willing to do in the absence of government support was to help the Bank of England find the gold it would need as news of the crisis spread. In time-honoured fashion, he had already sent an immediate request to Alphonse for a three-month loan of £2 million in gold from the Banque de France to its counterpart in Threadneedle Street. On November 12 Lidderdale asked Natty to arrange for a further £1 million to be sent; this too was immediately done, with consols accepted by the Banque as security pending an appropriate issue of treasury bills.
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The effect was to ease pressure on the Bank, helping to boost its reserve from the low point of £11 million on November 7 to £16.6 million a month later. As Alphonse pointed out, however, this could not be “considered as a solution of all the difficulties.” The key remained to bring Salisbury on board, which meant overcoming the opposition of Goschen. Already on November 12 Natty had gained half a point: after his meeting with Salisbury, the Cabinet agreed to pass a bill of indemnity if the Bank of England were forced to violate its charter by lending to Barings on “Argentine securities ...
provided they obtained Gladstone’s consent
.” This helps explain why Natty had found his interview with Salisbury “rather satisfying”: he felt he was overcoming the government’s obduracy. The next day, apprehension of “some serious contingency” (as the banker John Biddulph Martin put it) began to spread, and “the many rumours that had been in circulation concentrated themselves with more and more persistence on the name of Baring Bros.,” though when Biddulph left the City “everything [was still] going on as usual.” It was only on Friday the 14th that dangerously large numbers of bills on Barings began to be brought to the Bank of England for discount; and it was this which decisively strengthened the case for direct government action. That afternoon, with Goschen on his way to a routine speaking engagement in Scotland, Salisbury and Smith agreed to bear half of any loss arising from Barings’ bills taken in by the Bank during a twenty-four period beginning at 2 p.m. that day.

The next move was to set up a guarantee fund to spread the costs of any loss which might be left when Barings’ assets were finally liquidated. This was achieved at a meeting in the Governors’ Room at the Bank between members of the Bank’s Committee of Treasury and the leading merchant bankers. Again the negotiations were delicately balanced. Lidderdale opened the bidding by saying that the Bank itself would pledge £1 million on condition that at least £3 million was guaranteed by other City firms. Currie promptly offered £500,000 on condition that Rothschilds do the same. Once again, the fate of Barings was in Natty’s hands. According to Tom Baring (no unbiased party) he hesitated and was only “shamed” by Currie into agreeing. Currie himself recorded more reliably that Natty “hesitated and desired to consult his brothers”—that old Rothschild device to buy time—“but was finally and after some pressure persuaded.” That pressure, according to Edward Hamilton, took the form of Lidderdale telling Natty: “We can get on without you.”

Perhaps they could have; but Natty’s assent, however reluctantly given, made the task immeasurably easier: thereafter, the guarantee fund grew rapidly as all the leading merchants joined the list of contributors, followed by the joint-stock banks the following day. By the end of the twenty-four-hour “window,” £10 million had been accumulated (the figure later rose to £17 million, though only £7.5 million was actually needed)—proof, as Alphonse commented,

More important, the news of the government guarantee and the formation of the syndicate reassured holders of bills endorsed by Barings that they would get their money. Still, this was far from being the happy ending of the story; and the ramifications of the Barings crisis show just why Natty had hesitated at the crucial moment. The possibility still existed of a general Argentine default, which would at a stroke have wiped out the value of a fifth of Barings’ assets. Even as things stood, Argentine securities were down to 40 per cent of their March 1889 value by July 1891. Natty now found himself chairman of a committee of bankers entrusted with the task of defending the interests of all British bondholders in Buenos Aires.
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Although he favoured the imposition on the government of a programme of currency stabilisation based on the hypothecation of customs revenues, a more piecemeal approach ended up being adopted. In 1892 it was agreed to advance the government a new loan in order that it should buy the waterworks and thus liquidate one of Barings’ most onerous obligations; but that merely increased the Argentine external debt to £38 million and a further loan in 1893 pushed the total up still further. The condition of this second loan—the so-called Romero agreement—was financial control over the Argentine rail network. It was not in fact until 1897 that the Argentine government fully resumed interest payments.

This delay inevitably slowed down the winding up of the old Barings’ partnership which, as Alphonse pointed out, was the key to “the whole question”: “[I]t is not enough to have prevented a momentary suspension of the house of Baring,” he wrote on December 29, “worse has yet to be forestalled by the liquidation of the ... affairs that have caused the embarrassment.” In April 1893, with the sale of Barings’ assets proceeding more slowly than expected, the bankers’ guarantee had to be extended (albeit on a reduced scale) to November the following year. Although Cecil Baring remarked that Natty was “very humane” when a new company—Baring Estate Co.—was set up to liquidate the remaining Argentine bonds, there is no doubt that the Rothschilds resented the continuing claim on their resources which the Barings guarantee entailed. It was only in 1894 that the reconstituted Barings finally repaid the advances made by the guarantors.

All this helps to explain why Natty’s standing in official circles was enhanced by the Barings crisis. It was not just that Revelstoke was brought low; the Rothschilds themselves had played a pivotal role in averting a potentially acute financial crisis. Before the crisis, Edward Hamilton had been rather disdainful of the Rothschilds. In April 1889, at the time of a minor Treasury operation in exchequer bills, he had written in his diary: “Though I always think it well to keep clear of them in the East End I actually lunched in New Court.” When the Liberals came back in, however, Natty was closely consulted by the new Chancellor Harcourt on the complex question of stock exchange stamp duties. Ten years later, on the eve of the next Liberal government, Hamilton named Natty—along with Ernest Cassel and the second Lord Revelstoke—as one of the “first counsellors” and “representative [City] men” to whom any new Chancellor of the Exchequer should be introduced.

What had happened in 1890 was that a bank which, according to the formal rules of the financial market, should have failed was bailed out by a collective intervention initiated by the Bank of England, underwritten at the critical juncture by the government and paid for by a broad coalition of other City houses under the leadership of Currie and Rothschild. For the government and hence the taxpayer, it was a cheap solution: cheaper, at any rate, than sending a gunboat or an invasion force, as might conceivably have been done if Argentina had been a Middle Eastern defaulter. The price the banks paid was low too: it amounted to little more than the cost of tying up money in advances to Barings’ creditors, which was much less than the cost of letting Barings fail. Yet one question remains: why did the Rothschilds themselves not also go the way of Barings? For in many ways they were as heavily engaged in Latin American finance. Comparing Barings’ experience with that of the Rothschilds in Brazil helps to clarify the relative costs and benefits of informal empire.

On November 1890 Natty had told Salisbury that he “was quite indifferent ... he had no liabilities.” This was sheer bluff. In reality, the Rothschilds had been grap pling for some time with their own Latin American debt crisis. We have already seen how Lionel revived the old Rothschild connection with Brazil in the 1860s. There was a lull in Brazilian government borrowing in the 1870s after the end of the Paraguayan War—the only major issue was a £5.3 million loan in 1875—but the 1880s saw a fresh bout of activity in which once again the Rothschilds acted as the government’s sole issuing agent in London. Altogether, the Rothschilds were responsible for Brazilian government bond issues totalling £37 million between 1883 and 1889, as well as £320,000 for the Bahia-San Francisco railway company. In addition to helping consolidate the existing floating debt and convert earlier bonds to a lower rate of interest, this money was used to finance interest payments to existing railway companies and to subsidise shipping companies, so that it was at least partly being used for developmental and especially infrastructural investment. All seemed to be proceeding well—slavery was abolished in 1888 and the currency regained its gold parity the following year—when the Emperor Pedro was overthrown by a republican revolution backed by the army. This appears to have taken the Rothschilds completely by surprise. As in Argentina, there was a run on the currency and a slump in the overseas quotation of Brazilian bonds. By 1893 the country was in a state of civil war, with both the navy and monarchists in the south of the country defying the new government. Signs of stabilisation in 1895 were illusory: in 1896-7 a new revolt flared up among the peasants of the north-east.

Why did this not lead to a Rothschild crisis in parallel to the Barings crisis? One obvious answer is that in absolute terms the London house lost “only” around £740,000 between 1890 and 1893. This was partly because the Rothschilds did not hold large quantities of Brazilian bonds themselves: in 1886, for example, they accounted for just 2.4 per cent of the London house’s total assets. Secondly, as mentioned above, the Rothschilds maintained a far higher ratio of capital to liabilities than the Barings: even at its lowest point in the period (1890) it was still 19.5 per cent. They were therefore better placed to cope with crises of the sort which happened in 1889. Finally, and perhaps most obviously, the capital of the London house was £5.9 million in 1890, compared with £2.9 million for Barings, to say nothing of the capital of the other Rothschild houses. The losses they suffered were therefore relatively much smaller.

Rothschilds were not Barings; nor was Brazil Argentina. Despite the political instability of the decade after 1889, it was not in fact until 1898 that the government declared a moratorium on its external debt. The ability of the government to maintain debt service until this point had surprised Alphonse, but it was really not so remarkable. Compared with many other major debtor states of the period, Brazil was not highly geared: even at its peak in 1898-9, total public debt was just 400 per cent of tax revenue. Interest and amortisation of the external debt generally consumed a relatively small percentage of total government expenditure: the average figure of 10.5 per cent for the years 1890-99 was markedly lower than comparable figures for other borrowing states. In fact, it was not until
after
the 1898-1900 stabilisation that a real debt problem began to develop. Between 1890 and 1914, the London house issued a staggering £83 million of Brazilian public sector bonds and a further £5.8 million of private sector securities. In addition, Natty and his brothers became heavily involved in a parallel expansion in Chilean borrowing, issuing Chilean bonds worth £33 million between 1886 and 1914. These accumulations of debt far exceeded the economic growth which these countries were capable of achieving, even with world demand rising for their staple exports (coffee and rubber in the case of Brazil, guano and copper in Chile). Between 1890 and 1913, the total Brazilian debt (in sterling) rose by a factor of 3.5; real gross domestic product grew just 2.7 times. Moreover, the rapid expansion of coffee production in the state of São Paulo—it quadrupled between 1870 and 1900—led to a crisis of excess supply.